Registration for Index-Linked Annuities and Registered Market Value Adjustment Annuities; Amendments To Form N-4 for Index-Linked Annuities, Registered Market Value Adjustment Annuities, and Variable Annuities; Other Technical Amendments

Federal RegisterJul 24, 2024

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, and 274

[Release No. 33-11294; 34-100450; IC-35273; File No. S7-16-23]

RIN 3235-AN30

Registration for Index-Linked Annuities and Registered Market Value Adjustment Annuities; Amendments To Form N-4 for Index-Linked Annuities, Registered Market Value Adjustment Annuities, and Variable Annuities; Other Technical Amendments

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting rule and form amendments to provide a tailored form to register the offerings of registered index-linked annuities (“RILAs”). Specifically, the Commission is amending the form currently used by most variable annuity separate accounts, Form N-4, to require issuers of RILAs to register offerings on that form as well. To facilitate this amendment, the Commission is also amending certain filing rules and making other related amendments. These changes will implement the requirements relating to RILAs contained in the Consolidated Appropriations Act, 2023. The Commission is also extending the registration, filing, and disclosure requirements that the Commission is adopting for RILA offerings to the offerings of registered market value adjustment annuities. Further, the Commission is adopting other amendments to Form N-4 that will apply to all issuers that use that form. The Commission is applying to RILA and registered market value adjustment annuity advertisements and sales literature a current Commission rule that provides guidance as to when sales literature is materially misleading under the Federal securities laws. Finally, the Commission is adopting technical amendments to Forms N-6 and N-3 to correct errors from prior Commission rulemakings.

DATES:

Effective date:

This rule is effective September 23, 2024.

Compliance dates:

The applicable compliance dates are discussed in section II.J of this Release.

FOR FURTHER INFORMATION CONTACT:

Pamela Ellis, Alexis Hassell, Rachael Hoffman, Michael Khalil, Amy Miller, or Gregory Scopino, Senior Counsels; Bradley Gude, Branch Chief; Amanda Hollander Wagner, Senior Special Counsel; or Brian McLaughlin Johnson, Assistant Director, Investment Company Regulation Office, at (202) 551-6792; Min Oh, Senior Counsel; or Elizabeth Bentzinger or Michael Kosoff, Senior Special Counsels, Disclosure Review and Accounting Office, at (202) 551-6921, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:

The Commission is amending the following rules and forms:

15 U.S.C. 77a

et seq.

Commission reference

CFR citation

(17 CFR)

Securities Act of 1933 (“Securities Act”):

Rule 156

§ 230.156.

Rule 172

§ 230.172.

Rule 405

§ 230.405.

Rule 415

§ 230.415.

Rule 424

§ 230.424.

Rule 433

§ 230.433.

Rule 456

§ 230.456.

Rule 457

§ 230.457.

Rule 485

§ 230.485.

Rule 497

§ 230.497.

Rule 498A

§ 230.498A.

Regulation S-T:

Rule 313 of Regulation S-T

§ 232.313.

Rule 405 of Regulation S-T

§ 232.405.

Forms:

Form N-3

§ 239.17a and 274.11b.

Form N-4

§ 239.17b and 274.11c.

Form N-6

§ 239.17c and 274.11d.

Form 24F-2

§ 239.66 and § 274.24.

Table of Contents

I. Introduction and Background

A. Overview of RILA Features

B. Overview of Registered MVA Annuity Features

C. Current Registration Requirements for RILAs and Registered MVA Annuities

D. Developments and Analysis Informing Final Amendments

1. Investor Testing Informing Final Amendments

2. Analysis of Comments on Recurring Disclosure Topics Informing Final Amendments

E. Overview of the Final Amendments

II. Discussion

A. Use of Form N-4 for RILAs

B. Use of Form N-4 for Registered MVA Annuities

C. Contents of Form N-4

1. Front and Back Cover Pages (Item 1)

2. Overview of the Contract (Item 2)

3. Key Information Table (Item 3)

4. Principal Disclosure Regarding Index-Linked Options and MVA Options (Items 6 and 17)

5. Principal Risks of Investing in the Contract (Item 5)

6. Addition of Contract Adjustments and Other Amendments to Fee and Expense Disclosures (Items 4, 7, and 22)

7. Information About Contracts With Index-Linked and/or MVA Options (Item 31A)

8. Other Amendments and Provisions

9. Remaining Form N-4 Items

10. Inline XBRL

D. Option To Use a Summary Prospectus

1. Overview—Use of Summary Prospectus for Non-Variable Annuities

2. Initial Summary Prospectus

3. Updating Summary Prospectus

4. Online Accessibility of Contract Statutory Prospectus and Certain Other Documents Relating to the Contract

5. Other Requirements for Summary Prospectus and Other Contract Documents

E. Accounting (Items 16 and 26)

F. Filing and Prospectus Delivery Rules

1. Fee Payment Method and Amendments to Form 24F-2

2. Post-Effective Amendments and Prospectus Supplements

3. Prospectus Delivery

G. Communication Rules Applicable to Non-Variable Annuities Sales Literature (Rule 156)

2. Free Writing Prospectuses and Advertisements (Rules 433 and 482)

H. Existing Commission Letters

I. Technical Amendments to Forms N-3 and N-6

J. Effective and Compliance Dates

III. Other Matters

IV. Economic Analysis

A. Introduction

B. Baseline

1. Affected Parties

2. Current Regulatory Requirements

3. Market Practice

C. Benefits and Costs

1. Benefits

2. Costs

D. Effects on Efficiency, Competition, and Capital Formation

E. Reasonable Alternatives Considered

1. Creating an Entirely New Registration Form for RILAs

2. Alternatives to Specific Form N-4 Amendments

3. Limiting Scope of Structured Data Requirements

V. Paperwork Reduction Act

A. Rule 498A

B. Form N-4

C. Form 24F-2

D. Investment Company Interactive Data

VI. Regulatory Flexibility Act Certification Statutory Authority

I. Introduction and Background

The Commission is adopting rule and form amendments (“final amendments”) that are designed to help investors make informed decisions regarding RILAs. To modernize and enhance the registration and disclosure framework for RILAs, we are adopting amendments that will require offerings of RILAs to be registered on Form N-4, the registration form for most variable annuities, as well as adapt that form to accommodate RILAs. These amendments finalize rule and form amendments that the Commission proposed in September 2023.

See

Registration for Index-Linked Annuities; Amendments to Form N-4 for Index-Linked and Variable Annuities, Investment Company Act Release No. 35028 (Sept. 29, 2023) [88 FR 71088 (Oct. 13, 2023)] (“Proposing Release” or “proposal”). The Commission voted to issue the Proposing Release on September 29, 2023. The release was posted on the Commission website that day, and comment letters were received beginning the same day. The comment period closed on November 28, 2023. We have considered all public comment received through May 28, 2024. The comment letters on the Proposing Release are available at

https://www.sec.gov/comments/s7-16-23/s71623.htm.

The amendments implement Congress' directive to the Commission in Division AA, Title I of the Consolidated Appropriations Act, 2023 (“RILA Act”) to adopt a new registration form for RILAs within 18 months of enactment.

The RILA Act requires the Commission to design the form to ensure that a purchaser using the form receives the information necessary to make knowledgeable decisions, taking into account (1) the availability of information; (2) the knowledge and sophistication of that class of purchasers; (3) the complexity of the RILA; and (4) any other factor the Commission determines appropriate.

Publix Law 117-328; 136 Stat. 4459 (Dec. 29, 2022). The RILA Act provides that, if the Commission fails to adopt the form within 18 months of enactment, RILA issuers can begin registering RILA offerings on existing Form N-4.

The Commission's amendments will result in disclosure requirements for RILAs that are tailored to the particular characteristics of RILAs and comparable to variable annuity disclosure. We are also adopting related amendments to various Commission rules to effectuate the new disclosure requirements for RILAs and for further consistency in the registration, filing, and disclosure framework for RILAs compared to other similar annuity products. These amendments include, among other things: amendments permitting RILA issuers to use summary prospectuses; amendments that will result in the same requirements for RILAs and variable annuities in terms of updating the issuer's prospectus each year; and amendments that address how RILAs will register and pay for new shares, as well as other aspects of the registration and offering process. Furthermore, we are adopting amendments to extend the registration, filing, and disclosure approach we are adopting for RILAs to annuity contracts that offer fixed investment options and apply market value adjustments (“MVAs”) to amounts withdrawn from a fixed option before the end of the fixed option's term, where the offering is required to be registered with the Commission because of the MVA (“registered MVA annuities” and, collectively with RILAs, “non-variable annuities”).

We are additionally adopting other amendments to Form N-4 that will apply to all issuers that use that form, which are informed by the staff's historical experience in administering the form and relevant investor testing.

We are also adopting amendments that will apply a current Commission rule—which provides guidance as to when sales literature is materially misleading under the Federal securities laws—to RILA and registered MVA annuity advertisements and sales literature. Finally, we are adopting technical amendments to Forms N-6 and N-3 to update certain references used in those forms.

See

facing page of final Form N-4 in final Form N-4;

see also

Feedback Flyer

available at https://www.sec.gov/files/rules/proposed/2023/rila-feedback-flyer.pdf.

One commenter, while not commenting on the investor testing substantively, discussed the RILA trends that the OIAD Investor Testing Report described, as discussed in more detail below.

See infra

footnote 305 and accompanying text.

The Commission's Investor Advocate also provided comments discussing the investor testing process and supporting the proposed rules, stating the belief that the proposed RILA registration form would make it easier for investors to understand RILAs.

The Investor Advocate stated that the proposed rule's registration form would be more helpful for investors than the forms currently used for RILA registration. The Investor Advocate also stated that modified Form N-4 “is likely to improve investor comprehension related to the features, costs, and risks of RILAs.”

See

Comment Letter of Cristina Martin Firvida, SEC Investor Advocate (Dec. 22, 2023) (“Investor Advocate Comment Letter”).

In addition to these statements, the Investor Advocate suggested areas in which “more work can be done to help investors make well-informed decisions about RILAs and other complex financial products.” The Investor Advocate stated that the proposed rule's registration form for RILAs, while informed by investor testing efforts, was not tested itself, and that this represents a missed opportunity in the Commission's rulemaking process. While the RILA Act directed the Commission to “engage in investor testing” when developing the registration form for RILAs, the Act did not require that the entirety of the form be investor tested, and doing so would have been impracticable under the circumstances due to the statutory rulemaking timeline, taking into account the time it takes to develop and execute well-designed and probative investor testing. As a result, investor testing efforts necessarily entailed strategic choices about topics on which to focus. These timing factors also required consideration of disclosure areas where maximizing comprehension could be particularly impactful.

For these reasons, investor testing of RILA registration statement disclosure focused primarily on a sample of RILA-related disclosures that could appear in the KIT, if Form N-4 were amended to address RILA offerings.

As discussed in the Proposing Release and below, the KIT—which provides summary disclosure in a specific sequence and in a standardized presentation—appears in variable annuity prospectuses, and the Commission proposed to include KIT disclosure in RILA prospectuses.

The required ordering, contents, and standardization of KIT disclosure made the sample RILA-related disclosure especially amenable to investor testing, as these structural aspects made it possible to test variations on required disclosure elements easily. The summary disclosure in the KIT covers core features and risks of the annuity that the registration statement describes, with more detail elsewhere in the registration statement. For this reason, using the KIT to determine areas where investor comprehension could be enhanced was particularly impactful, as knowledge gained from this investor testing could be applied to disclosure in multiple other areas of the registration statement. The KIT is one of the first disclosure items that appears not only in the statutory prospectus, but also in the summary prospectus for issuers that choose to use summary prospectuses. It is also formatted in a manner that is designed to enhance readability. The investor testing therefore focused on disclosure that could have maximal impact in terms of investor attention.

See

OIAD Investor Testing Report.

See

Proposing Release at Section II.B.2;

see also

Item 2 of current Form N-4 (current KIT requirements);

infra

Section II.C.3 (describing amendments to current KIT requirements).

While the Investor Advocate states that there is no “data to indicate whether the registration form effectively conveys the information necessary for investors to make well-informed investment decisions about RILAs,” the sample KIT disclosure did include topics that comprise the primary features and risks of RILAs, and the investor testing did identify aspects of this disclosure that investors may find particularly challenging to understand. This in turn provided helpful input in identifying the disclosure areas where clear language, and enhanced focus in the registration statement, could help investors understand unique, and often complex, aspects of RILAs. We discuss these disclosure areas in more depth in Section II below.

The Investor Advocate further stated that, although the Commission has “made commendable efforts to improve the clarity and conciseness of disclosure provided to investors within the existing regulatory disclosure infrastructure,” new and innovative approaches to disclosure are encouraged to significantly reduce investors' disclosure burden. The Investor Advocate encouraged the Commission “to explore more significant departures from the status quo in the realm of disclosure related to RILAs and other complex products.” We agree that exploring innovative disclosure approaches could enhance the investor experience for investors in complex products.

A wholesale reimagining of disclosure for funds and other registered investment products, however, is outside of the scope of this rulemaking and impracticable in the context of this rulemaking given statutory time constraints. We also believe that requiring RILAs to use Form N-4, and adapting the current disclosure approach for variable annuities to RILAs, is consistent with the RILA Act's mandate as discussed below.

Furthermore, we agree that continuing to test specific Commission-mandated disclosures, including to assess how investors respond to these disclosures, as well as continuing to analyze the Commission's approach to its disclosure regime generally, are important complements to our regulatory program. We encourage Commission staff to incorporate these investor testing principles not only in the course of recommending new disclosure requirements, but also in continuing to develop its investor testing program outside of the confines of particular rulemaking actions.

The Commission is continually considering ways to enhance disclosure and the retail investor experience.

See, e.g.,

Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company Act Release No. 33113 (June 5, 2018) [83 FR 26891 (June 11, 2018)] (“Investor Experience RFC”).

See infra

Section II.A.

In addition to investor testing focused specifically on sample RILA disclosure, our final amendments—and the current disclosure requirements in Form N-4 that we are building upon—also draw on the Commission's past investor testing efforts, outreach, and other empirical research concerning investors' preferences. This includes, for example, information about summary content and layered disclosure approaches.

The Commission has historically received feedback showing that investors generally prefer concise, layered disclosure.

Investors participating in certain past quantitative and qualitative investor testing initiatives on the Commission's behalf have also expressed preferences for, wherever possible, the use of a summary containing key information about an investment product or service written in clear, concise, and understandable language and presented in an accessible format.

Each of these sources of evidence of investor preferences, understanding, and behaviors in response to disclosures specific to RILAs and other investment products more generally has provided important context and support for the final amendments' approach to RILA disclosure.

See

Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts, Investment Company Act Release No. 33286 (Oct. 30, 2018) [83 FR 61730 (Nov. 30, 2018)] (“VASP Proposing Release”) at paragraphs accompanying nn.38-43.

See, e.g.,

Investor Experience RFC;

see also

Proposing Release at n.61 (discussing feedback in comments on the Investor Experience RFC, generally showing that retail investors prefer concise, layered disclosure and feel overwhelmed by the volume of information they currently receive, and reflecting a preference for shorter summary disclosures, with additional information available online or upon request).

See

Proposing Release at n.62.

2. Analysis of Comments on Recurring Disclosure Topics Informing Final Amendments

The proposed amendments collectively were designed to provide investors with disclosures tailored to RILAs and to highlight key information about these complex products, building on the Commission's layered disclosure framework for variable annuities. The proposed requirements were developed with consideration for clear, concise, and understandable disclosure about RILA features and risks. Certain commenters expressed concern, however, that the proposed disclosure requirements included “excessive repetition,” especially with respect to certain topics.

Commenters stated that excessive repetition adds to the length of the prospectus without commensurate value to investors, obscures new information that investors should be focusing on, and is not consistent with plain English principles. In addition to general concerns about repetition in the proposed requirements, commenters expressed concerns about specific disclosure areas where they viewed the proposed requirements as resulting in particularly repetitive disclosure.

See

CAI Comment Letter;

see also

Comment Letter of Ova Datop (Oct. 25, 2023) (“Datop Comment Letter”).

See

CAI Comment Letter (discussing proposed maximum potential loss disclosure requirements); Datop Comment Letter (discussing proposed risk warnings).

We agree that no disclosure should be repeated simply for the sake of repetition, and we also agree that repetition in disclosure can have negative effects on investor understanding as commenters expressed. As discussed below, the final form amendments take commenters' concerns into account. There are certain areas where the final amendments reduce the discussion of the same or similar topics in multiple locations, where this reduction could appropriately be made while continuing to promote the goal of highlighting key information about RILAs and enhancing understanding of RILA features and risks.

See, e.g.,

discussion below about changes from the proposal to remove some of the numeric examples illustrating maximum potential loss that, as proposed, would have appeared in multiple locations throughout the prospectus (at

infra

Sections II.C.2 and II.C.4).

The final amendments, like the proposal, continue to incorporate the principle of layered disclosure. Layered disclosure aims to provide investors with key information relating to an investment's features, benefits, and risks in a concise and reader-friendly presentation, with more-detailed or technical information available to those investors who find the information valuable. The use of layered disclosure means that the disclosure requirements we are adopting necessarily address particular topics in more than one location in the registration statement. Where this occurs, the disclosure requirements intentionally include summary disclosure in the first “layer,” and additional details building on the summary in the second “layer.”

This approach is designed to help investors with different informational needs access the information that will be most useful to them.

For example, the KIT will put investors on notice of the existence and general impact of a contract adjustment, while other disclosure later in the prospectus discusses contract adjustments in detail, including a brief discussion in simple terms of the manner in which contract adjustments are determined.

See

Items 3 and 7(e) of final Form N-4. If an investor wants more details about the specific formulas that are used to calculate contract adjustments, this information is available in the SAI.

See

Item 22(d) of final Form N-4.

Additionally, and as discussed in more detail below, there are certain disclosure requirements in Form N-4 as amended that address similar topics as other disclosure requirements, where investors could benefit from considering these topics in several different contexts. This also reflects that, except with respect to certain disclosure items that are designed to be read in tandem, RILA investors may not necessarily read a prospectus from cover to cover, but instead may choose to read sections of the prospectus about topics where they are seeking particular information.

For instance, in addition to the numeric examples illustrating maximum potential loss, the final disclosure requirements include narrative discussion of a RILA's maximum potential loss from poor index performance in several locations in the prospectus. This is intentional. RILAs are frequently marketed as a product that will protect against investment losses through loss-limiting features. Information about maximum potential loss is relevant in the contexts of the contract overview and KIT, as well as in considering principal risks and more in-depth disclosure about the investment options a contract offers.

Therefore, disclosure that is designed to enhance understanding of this aspect of a RILA contract, in varying contexts, will help investors make informed decisions that take into account this often-misunderstood aspect of investing in a RILA.

As discussed below, we anticipate that investors will read the Overview and KIT sections of the prospectus together.

See infra

Sections II.C.2 and II.C.3.

See, e.g., infra

Sections II.C.2, II.C.3, II.C.4, and II.C.5.

See, e.g.,

Proposing Release at Section I.C.

E. Overview of the Final Amendments

We are adopting rule and form amendments that modernize and enhance the registration, filing, and disclosure framework for RILAs by adapting the existing framework that is familiar to investors and issuers for variable annuity separate accounts to accommodate RILAs. The final amendments implement the RILA Act's mandate.

•

Use of Form N-4 to Register RILA Offerings.

As proposed, we are amending Form N-4 so that issuers seeking to register the offering of RILAs must use that form. To accommodate this, we are also adopting amendments to Form N-4 that specifically address the features and risks of RILAs, with certain modifications from the proposal in consideration of comments received. These modifications address, among other things, disclosure relating to the potential for investment loss from an investment in a RILA, current limits on index gains, and guaranteed limits on index losses or gains. Further, because the insurance company will register the offering of a RILA on Form N-4 under the final amendments, it will be subject to the requirements in the form related to financial statements. This includes, as proposed, the form instruction that currently permits variable annuity issuers to file insurance company SAP financial statements in certain circumstances. Generally as proposed, the final amendments require RILA issuers to tag certain information in Inline eXtensible Business Reporting Language (“Inline XBRL”) format.

•

Use of Form N-4 for Registered MVA Annuities.

In a change from the proposal, the final amendments extend the registration, filing, and disclosure requirements we are adopting for RILA offerings to offerings of registered MVA annuities on Form N-4.

•

Form N-4 Amendments for Variable Annuity Offerings.

We are adopting form amendments that are applicable to offerings of variable annuities. These amendments are informed by the staff's historical experience in administering the form and respond to observations from investor testing relevant to variable annuity offerings.

We are adopting these amendments generally as proposed, with some modifications in consideration of comments received.

See id.

at n.63 and accompanying paragraph.

•

Summary Prospectus.

Consistent with the inclusion of RILAs on Form N-4 and generally as proposed, we are adopting amendments that permit RILA issuers to make use of the summary prospectus framework available to variable annuity registrants on Form N-4. In a modification from the proposal, issuers of registered MVA annuities also will be able to use the summary prospectus framework, consistent with the inclusion of registered MVA annuities on Form N-4.

•

Updates to the Filing Rules.

To accommodate RILA and registered MVA annuity offering registrations on Form N-4, we are adopting amendments that require issuers of these securities to pay fees in arrears on Form 24F-2, as well as amendments to address RILAs and registered MVA annuities in the rules that variable annuities use to file post-effective amendments and to update prospectuses. We are adopting these amendments as proposed with conforming amendments to address the inclusion of registered MVA annuities on Form N-4.

•

Communications Rules Applicable to Non-Variable Annuities.

The final amendments, as proposed, require RILA issuers to comply with rule 156, which provides guidance as to when sales literature is materially misleading under the Federal securities laws. We are adopting conforming amendments to rule 156 to address the inclusion of registered MVA annuities on Form N-4. Additionally, in a change from the proposal, we are also making a technical amendment to rule 433 to allow those non-variable annuity issuers that can meet the rule's conditions to continue to use a free writing prospectus without it needing to be preceded or accompanied by a prospectus that satisfies the requirements of section 10 of the Securities Act.

II. Discussion

A. Use of Form N-4 for RILAs

Most variable annuity issuers register variable annuity offerings on Form N-4, which the Commission designed to provide investors with product-specific information about annuity contracts, and which utilizes the summary prospectus layered disclosure framework the Commission adopted in 2020 for variable contracts.

As proposed, we are requiring insurance companies to register RILA offerings on Form N-4, leveraging the form's existing insurance-product specific disclosures and framework while incorporating revised disclosures informed by investor testing and staff experience to assist investors in making knowledgeable decisions about RILA offerings.

Variable annuities register on Form N-3 if they are issued by separate accounts that are organized as management investment companies. However, most variable annuities are issued by separate accounts that are organized as unit investment trusts and therefore use Form N-4.

See

Proposing Release at n.20. The separate account established by the sponsoring insurance company is the legal entity that registers its securities. Separate accounts are typically registered as investment companies under the Investment Company Act.

See

section 2(a)(37) of the Investment Company Act. The Commission first adopted the registration form for variable annuities approximately 40 years ago.

See

Registration Forms for Insurance Company Separate Accounts that Offer Variable Annuity Contracts, Investment Company Act Release No. 14575 (June 14, 1985) [50 FR 26145 (June 25, 1985)] (“Forms N-3 and N-4 Adopting Release”).

See

the facing page of final Form N-4 (Form N-4 is “to be used by insurance companies to register the offerings of registered index-linked annuity contracts . . . under the Securities Act”). Accordingly, following the compliance date for the final amendments, insurance companies will no longer be permitted to register RILA offerings on Forms S-1 or S-3, as they do today.

Commenters broadly supported registering RILA offerings on Form N-4.

A number of commenters agreed that proposed Form N-4 would provide RILA investors with more meaningful and helpful disclosures as compared to the disclosures required on the registration forms currently used by RILAs that are not tailored to RILA features.

Some commenters emphasized that the proposed disclosures about the contract and its features and the incorporation of Form N-4's layered disclosure would be of particular benefit to investors.

Additionally, one commenter suggested that requiring RILAs to register on forms that are not tailored for RILA offerings has impeded the ability of RILA investors to find and understand the information that is most relevant to their investment decisions, and has also slowed product development and impeded the entry of new issuers to the RILA marketplace.

Commenters suggested that investors also would benefit from registering RILAs and variable annuity contracts on the same registration form because it would facilitate the ability of investors to

compare and contrast different RILA and variable annuity offerings.

One of these commenters also stated that, by leveraging the experience of investors, registrants, and Commission staff with the existing Form N-4 framework, the proposal would help achieve greater regulatory uniformity, simplify the registration of RILA and variable annuity combination products, and reduce the burdens insurance companies face in preparing RILA registrations.

See

Comment Letter of the American Council of Life Insurers (Nov. 28, 2023) (“ACLI Comment Letter”); Comment Letter of Better Markets, Inc. (Nov. 28, 2023) (“Better Markets Comment Letter”); CAI Comment Letter; Comment Letter of Gainbridge Life Insurance Company and Delaware Life Insurance Company (Nov. 28, 2023) (“Gainbridge Comment Letter”); Investor Advocate Comment Letter; Comment Letter of the Insured Retirement Institute (Nov. 28, 2023) (“IRI Comment Letter”). No commenters disagreed with the proposed use of Form N-4 to register RILA offerings.

See id.

One of these commenters stated that it would object to the inclusion on Form N-4 of additional company-related disclosures applicable to registrations under Forms S-1 and S-3 because those disclosures are less relevant to RILA offerings.

See

CAI Comment Letter.

See

Better Markets Comment Letter; CAI Comment Letter; Gainbridge Comment Letter; IRI Comment Letter; Investor Advocate Comment Letter.

See

IRI Comment Letter.

See

CAI Comment Letter; Gainbridge Comment Letter.

See

CAI Comment Letter.

After considering these comments, we are adopting a registration framework that requires the registration of RILA offerings on Form N-4 as proposed. Consistent with the views expressed by commenters, registering RILA offerings on final Form N-4 should benefit investors by requiring tailored disclosures relevant to RILA investors and facilitating the ability of investors to compare similar products. Registering RILA offerings on final Form N-4 also provides greater regulatory uniformity, reducing burdens for both RILA issuers in preparing RILA registration statements and Commission staff in reviewing them.

Finally, one commenter requested the Commission provide guidance regarding the ability of certain RILA contracts currently registered on Form S-3 to rely on 17 CFR 240.12h-7 (“rule 12h-7”) following their transition to Form N-4.

Rule 12h-7 provides an exemption from Exchange Act reporting applicable to insurance companies with respect to certain securities, including RILAs, that are registered under the Securities Act and regulated under State law. In order to be eligible for this exemption, among other conditions, the issuer of the securities must take steps reasonably designed to ensure that a trading market for the securities does not develop, including requiring written notice to, and acceptance by, the issuer prior to any assignment or other transfer of the securities and reserving the right to refuse assignments or other transfers at any time on a non-discriminatory basis (“anti-assignment clause”).

One commenter suggested that there are a number of RILA contracts that do not have an anti-assignment clause because the issuing insurance companies have chosen to register the offerings on Form S-3 and therefore have not relied on rule 12h-7 because Form S-3 is only available to issuers subject to Exchange Act reporting requirements. This commenter suggested that unilaterally adding an anti-assignment clause now to already-issued contracts previously registered on Form S-3 would violate State law. Now that RILA offerings will be registered on Form N-4, this commenter suggested that issuers of these RILA contracts would like to rely on rule 12h-7. As the Commission explained in rule 12h-7's adopting release, the anti-assignment clause requirement is an important condition of the exemption from Exchange Act reporting because it ensures that the issuer will take steps reasonably designed to preclude the development of a trading market in the contracts.

Although all issuers relying on rule 12h-7 are required to take such reasonable steps, rule 12h-7 provides that an anti-assignment clause is not required where it is prohibited by State law.

Under that rule, where an issuer of a RILA contract that is currently registered on Form S-3 is seeking now to rely on rule 12h-7, that issuer would not need to modify the contract to include an anti-assignment clause where including such a clause is prohibited by State law.

Whether including an anti-assignment clause is prohibited under State law is based on the facts and circumstances and laws of each applicable State.

See

CAI Comment Letter. Under the final amendments, RILAs that have previously registered offerings of securities on Forms S-1 or S-3 prior to the Compliance Date will need to file a post-effective amendment to their registration statement pursuant to rule 485(a) by May 1, 2026 using Form N-4.

See infra

Section II.J.

See

rule 12h-7(e).

See

Indexed Annuities and Certain Other Insurance Contracts, Exchange Act Release No. 34-59221 (Jan. 8, 2009) [74 FR 3138 (Jan. 16, 2009)] (“12h-7 Adopting Release”) at Section III.B.2.

See

rule 12h-7(e). Consistent with rule 12h-7(e), by “State law” we mean the law of any State or action of the insurance commissioner, bank commissioner, or any agency or officer performing like functions of any State.

Of course, an issuer seeking to rely on rule 12h-7 would also need to comply with the rule's other requirements, including that it takes steps reasonably designed to ensure that a trading market for the securities does not develop.

See

rule 12h-7(e).

B. Use of Form N-4 for Registered MVA Annuities

We are adopting amendments to require the offerings of registered MVA annuities to be registered on Form N-4 and, as a result, extend the registration and disclosure requirements we are adopting for RILAs to registered MVA annuities. Similar to the amendments we are adopting for RILAs, these amendments will benefit investors by providing a tailored disclosure regime with clear, relevant, and layered disclosure. Further, by including registered MVA annuities on Form N-4 along with RILAs and variable annuities, investors should benefit from being able to compare and contrast different types of annuity contracts. Both issuers and investors will also benefit by leveraging their existing familiarity with the form.

In the Proposing Release, we solicited comment on whether to require insurance companies to register the offerings of registered MVA annuities on Form N-4, and we detailed the various changes to disclosure that would be necessary to accommodate this change.

Commenters that spoke to this issue supported registering offerings of registered MVA annuities on Form N-4,

suggesting that investors in registered MVA annuities would benefit from a comparable disclosure regime that provides clear, relevant, and layered disclosure.

One of these commenters stated that registered MVA annuities are a significantly simpler product than RILAs and present a subset of identical risks to investors as RILAs.

Commenters also stated that many of the disclosures that would be required for RILAs on Form N-4 would also be appropriate for registered MVA annuities, such as disclosures on the operation of contract adjustments and the risks associated with such contract adjustments.

One commenter stated that only minor modifications to the disclosures for RILAs would be required to reflect that an investor's return in a RILA is based on the performance of an index while the return of a registered MVA annuity is based on a stated rate of interest.

Further, this commenter stated that registered MVA annuities

may be offered in combination products with variable annuities and/or RILAs that will be registered on Form N-4. Given that such products will have one prospectus, this commenter stated that investors, issuers, and the Commission would benefit from such products registering on Form N-4, rather than registering on both Form N-4 (for the variable annuity or RILA component) and Form S-1 or Form S-3 (for the registered MVA annuity component).

Proposing Release at Section II.H.

No commenters opposed using Form N-4 to register MVA annuity offerings, although one commenter urged that using Form N-4 should be optional in certain circumstances discussed below.

See infra

footnote 79. One commenter stated that contingent deferred annuities (“CDAs”) could be considered covered by the RILA Act and insurers should be permitted to use Form N-4 for these annuities under the provision in that Act allowing insurers to use Form N-4 for RILAs if the Commission does not provide a new registration form for RILAs by the statutory deadline.

See

VIP Working Group Comment Letter. We disagree. The RILA Act covers annuities that, among other things, have returns based on the performance of a benchmark index and may be subject to a market value adjustment if amounts are withdrawn before the end of the period during which that market value adjustment applies. CDA lifetime payment guarantees are not based on a benchmark or index and are not subject to such market value adjustments. Additionally, because CDAs are substantially different products than RILAs, significant modifications to Form N-4 would be required to accommodate offerings of CDAs.

See

CAI Comment Letter; IRI Comment Letter; VIP Working Group Comment Letter.

CAI Comment Letter.

See

IRI Comment Letter; CAI Comment Letter.

CAI Comment Letter.

At the same time, some commenters generally stated that registered MVA annuities should be permitted, but not required, to register on Form N-4.

Specifically, one commenter stated that, in particular, registration on Form N-4 should be optional for “closed blocks,” or registered MVA annuity offerings that no longer involve the issuance of new contracts.

CAI Comment Letter; IRI Comment Letter.

CAI Comment Letter. This commenter urged that if such closed blocks were required to register on Form N-4, the compliance period be extended from 12 months to 24 months to provide the necessary time to convert an additional class of contract to the new registration form.

See infra

Section II.J. for a discussion of effective and compliance dates for all rules and forms associated with the final amendments.

After considering comments, we have determined to require insurance companies to register offerings of registered MVA annuities on Form N-4 to provide investors with the tailored information necessary to make an investment decision, as discussed above.

Further, given the parallels outlined above between RILAs and registered MVA annuities and the use of combination contracts that can offer RILAs, registered MVA annuities, and variable annuities, registering offerings of registered MVA annuities on Form N-4 will be efficient for investors, insurance companies, and the Commission. As a result, we are requiring, not just permitting, the use of Form N-4 for registered MVA annuities. Permitting insurance companies to register offerings of closed block registered MVA annuities on Forms S-1 or S-3 would not provide these investor benefits or efficiencies. It also would hamper comparability if different registered MVA annuities provided materially different disclosure. However, the Commission administers the requirements for prospectuses included in registration statements on Form N-4 in a way that allows variances in disclosure or presentation—including now those relating to closed blocks of registered MVA annuities—if appropriate for the circumstances involved while remaining consistent with the objectives of the form.

See supra

Sections I.B. and I.C.

See final Form N-4, General Instruction C.1.(d). This rulemaking does not affect the Commission position on existing variable contracts whose issuers provide alternative disclosures to investors as stated in the VASP Adopting Release at Section II.E.3.

As a result of this change, registered MVA annuities must make the disclosures required in Form N-4 to the extent applicable. For example, they must meet the requirements of the front and back cover pages to the extent the disclosures apply to the offering of registered MVA annuities being registered.

As outlined in the Proposing Release, we also are adopting a number of specific disclosure requirements for registered MVA annuities designed to accommodate their inclusion on the form and provide investors disclosures tailored to registered MVA annuity products and highlight key information about these products.

See, e.g., infra

Section II.C.1.

See

Proposing Release at Section II.H.

Table 1 outlines the key amendments, including certain conforming amendments, we are adopting to Form N-4 to accommodate offerings of registered MVA annuities:

Table 1—Overview of Form N-4 for Registered MVA Annuities

Item

Description

Substantive changes from the current form

Discussion

Prospectus (Part A)

N/A

Facing Page and General Instructions

Added registered MVA annuity contracts to list of permissible uses

Section II.C.8(a), Section II.C.8(b).

N/A

General Instructions

Added definition of “Contract Adjustment” to account for MVA fixed account options

Section II.C.8(b).

Description of the Insurance Company, Registered Separate Account, and Investment Options

New contract adjustment disclosures for MVA fixed account options

Section II.C.4(a).

Charges and Adjustments

New contract adjustment disclosures applicable to MVA fixed account options

Section II.C.6(b).

Investment Options Available Under the Contract

New contract adjustment disclosures for MVA fixed account options

Section II.C.4(b).

Statement of Additional Information (Part B)

Financial Statements

Providing that insurance companies can use the relevant instructions with regard to offerings of registered MVA annuities and adding requirements relating to changes in and disagreements with accountants for registered MVA annuities

Section II.E.

Other Information (Part C)

31A

Information about contracts with Index-Linked Options and Fixed Options Subject to a Contract Adjustment

New disclosure of registered MVA annuity specific information

Section II.C.7.

In addition to these changes to Form N-4, we are providing to registered MVA annuities the same offering and filing framework we are extending to RILAs for the same reason as we are making these changes for RILAs as discussed in more detail below.

This includes, for example, amendments permitting registered MVA annuities to use a summary prospectus, pay securities fees annually based on net sales, and use the same process to update their registration statements that will apply to RILAs. To implement the inclusion of registered MVA annuities in the amendments to the rules under the Securities Act, we also are adding a defined term “registered market value adjustment annuity” to rule 405 that is consistent with the amendments to Form N-4.

We are also extending the same requirements as to the use of Inline XBRL to registered MVA annuities for the same reasons we are extending these requirements to RILAs.

See infra

Sections II.C, D, E, and F.

“Registered market value adjustment annuity” is defined as an annuity or an option available under an annuity, that is not a registered index-linked annuity, and (1) that is deemed a security; (2) that is offered or sold in a registered offering; (3) that is issued by an insurance company that is subject to the supervision of either the insurance commissioner or bank commissioner of any State or any agency or officer performing like functions as such commissioner; (4) that is not issued by an investment company; and (5) whose contract value may reflect a positive or negative adjustment (based on calculations using a predetermined formula, a change in interest rates, or some other factor or benchmark) if amounts are withdrawn before the end of a specified period. This definition mirrors that of “registered index-linked annuity” we are adding to rule 405 for RILAs, other than the last provision which is based on the definition of “contract adjustment” we are adding to Form N-4.

See infra

Section II.C.10.

C. Contents of Form N-4

Consistent with the proposal, many items of current Form N-4 will apply to RILAs in final Form N-4. These existing items of current Form N-4 will also apply to registered MVA annuities. We are also adopting amendments to Form N-4 to require disclosures specific to RILAs as well as amendments that also will apply to offerings of variable annuities. Some of these disclosures will also apply to registered MVA annuities. Table 2 outlines the substantive amendments we are adopting to Form N-4.

Some of the final amendments entail a non-substantive change such as a change to a defined term or specifying that the provision would continue to be applicable only to a registered separate account or variable option. These are not discussed in the following table but are instead discussed in Sections II.C.8 and II.C.9

infra.

Table 2—Overview of Form N-4

Item

Description

Substantive changes from the current form

Discussion

Prospectus (Part A)

Front and Back Cover Pages

Adding new legends and other standardized disclosures

Section II.C.1.

Overview of the Contract

New non-variable annuity-specific disclosures; moving order of appearance up

Section II.C.2.

Key Information

New non-variable annuity-specific disclosures; changing to a question-and-answer format; moving order of appearance down; change discussion of restrictions on optional benefits to cover all benefits

Section II.C.3.

Fee Table

New contract adjustment disclosure

Section II.C.6(a).

Principal Risks of Investing in the Contract

Providing more detailed disclosures applicable to all issuers

Section II.C.5.

Description of the Insurance Company, Registered Separate Account, and Investment Options

New non-variable annuity-specific disclosures and one new item regarding variable options

Section II.C.4(a).

Charges and Adjustments

New disclosures related to contract adjustments; renamed item

Section II.C.6(b).

General Description of Contracts

No substantive change

Section II.C.9(b).

Annuity Period

No substantive change

Section II.C.9(b).

Benefits Available Under the Contract

No substantive change

Section II.C.9(b).

Purchases and Contract Value

No substantive change

Section II.C.9(b).

Surrenders and Withdrawals

No substantive change

Section II.C.9(b).

Loans

No substantive change

Section II.C.9(b).

Taxes

No substantive change

Section II.C.9(b).

Legal Proceedings

No substantive change

Section II.C.9(c).

Financial Statements

No substantive change (but see Item 26)

Section II.E.

Investment Options Available Under the Contract

New non-variable annuity-specific disclosures

Section II.C.4(b).

Statement of Additional Information (Part B)

Cover Page and Table of Contents

No substantive change

Section II.C.9(b).

General Information and History

No substantive change

Section II.C.9(c).

Non-Principal Risks of Investing in the Contract

No substantive change

Section II.C.9(b).

Services

No substantive change

Section II.C.9(b).

Purchase of Securities Being Offered

New disclosure of specific contract adjustment information

Section II.C.6(c).

Underwriters

No substantive change

Section II.C.8(c).

Calculation of Performance Data

Clarifying only applies to variable options

Section II.C.8.

Annuity Payments

No substantive change

Section II.C.9(b).

Financial Statements

Providing that insurance companies can use the relevant instructions relating to financial statements and adding requirements relating to changes in and disagreements with accountants for non-variable annuities

Section II.E.

Other Information (Part C)

Exhibits

Adding power of attorney for all issuers and accountant letters for non-variable annuity issuers as exhibits

Section II.C.8(d).

Directors and Officers of the Insurance Company

No substantive change

Section II.C.9(c).

Persons Controlled or Under Common Control with the Insurance Company or the Registrant

No substantive change

Section II.C.9(c).

Indemnification

No substantive change

Section II.C.9(c).

Principal Underwriters

No substantive change

Section II.C.9(c).

31A

Information about contracts with Index-Linked Options and Fixed Options Subject to a Contract Adjustment

New disclosure of non-variable annuity specific information

Section II.C.7.

Location of Accounts and Records

No substantive change

Section II.C.8.

Management Services

No substantive change

Section II.C.9(b).

Fee Representation and Undertakings

Adding new non-variable annuity undertakings

Section II.C.8(d).

1. Front and Back Cover Pages (Item 1)

Currently, issuers using Form N-4 are required to include on the front and back cover pages basic identifying information about the issuer and the contract, information on how to review the document (

e.g.,

what the SAI is and where to find it), as well as certain legends, for example, one relating to the ability for an investor to cancel the contract within 10 days.

We are adopting amendments to require insurance companies registering offerings of non-variable annuities to include this general information on the front and back cover pages of the prospectus, as well as non-variable annuity—specific disclosures on the front cover page. We are adopting these amendments substantially as proposed, with modifications in response to comments. The following table summarizes the cover page requirements, as amended:

See

current Form N-4, Item 1.

Table 3—Information Required by Item 1 of Form N-4 As Amended

Item No.

Disclosure

Cover

Changed from proposal?

Identifying Information

Item 1(a)(1)

Registered separate account's name

Front

No.

Item 1(a)(2)

Insurance company's name

Front

No.

Item 1(a)(3)

Types of contracts offered (

e.g.,

group, individual, etc.)

Front

No.

Item 1(a)(4)

Name and class of contract

Front

No.

Item 1(a)(5)

List of types of investment options offered under the contract with cross references to the appendix with further information about those options

Front

No.

Item 1(a)(9)

Date of prospectus

Front

No.

Item 1(b)(4)

EDGAR identifier number

Back

No.

Legends

Item 1(a)(6)

Statement that the contract is a complex investment and involves risks, including potential loss of principal

For contracts that include an index-linked option:

A prominent statement, as a percentage, of the maximum amount of loss that an investor could experience from negative index performance after taking into account the current limits on index loss, which may include a range of the maximum amount of loss if the contract offers different limits on index loss

Front

Yes. Revised statements about potential for investment loss, manner in which the insurance company determines the maximum loss due to negative index performance, and minimum limits on index gains and losses.

Prominent disclosure of any minimum limits on index losses that will always be available under the contract or, alternatively, a prominent statement that the insurance company does not guarantee that the contract will always offer index-linked options that limit index losses, which would mean risk of loss of the entire amount invested

A prominent statement that the insurance company limits the amount an investor can earn on an index-linked option. A prominent statement, for each type of limit offered (

e.g.,

cap, participation rate, etc.), of the lowest limit on index gains that may be established under the contract

Item 1(a)(7)

Statement that the contract is not a short-term investment and is not appropriate for an investor who needs ready access to cash. Statement that withdrawals could result in, among other things, surrender charges and negative contract adjustments, including a prominent disclosure stating, as a percentage, the maximum potential loss resulting from a negative contract adjustment, if applicable

Front

No.

Item 1(a)(8)

Statement that the insurance company's obligations under the contract are subject to its financial strength and claims-paying ability

Front

No.

Item 1(a)(10)

Statement that the Commission has not approved or disapproved of the securities or passed upon the accuracy or adequacy of the disclosure in the prospectus and that any contrary representation is a criminal offense (as required in 17 CFR 230.481(b)(1))

Front

No.

Item 1(a)(11)

Statement that additional information about the contract is available on

Investor.gov

Front

No.

Item 1(a)(12)

A legend that states that if you are a new investor, you may cancel your contract within 10 days of receiving it without paying fees or penalties with some details about the operation of this process including whether a contract adjustment will be applied to the returned amount

Front

No.

Other Information

Item 1(b)(1)

Statement that the SAI contains additional information, that it is available to investors, and how investors may obtain the SAI or make inquiries about their contracts

Back

No.

Item 1(b)(2)

Statement about whether and from where information is incorporated by reference

Back

No.

Item 1(b)(3)

Statement that reports and other information about the registered separate accounts and, if applicable, the insurance company, are available on the Commission's website and that copies of this information may be obtained

Back

Yes. Applied this requirement to insurance companies in addition to separate accounts.

We proposed to make several changes to the front cover page, including four additional disclosures in Item 1(a).

Certain proposed changes received no comments and we are adopting them as proposed:

See

Proposing Release at Section II.B.1.

(1) Changes to Item 1(a)(1) to require disclosure of “the registered separate account's name” whereas this item previously asked for “the registrant's name.”

(2) Changes to Item 1(a)(2) to require disclosure of “the insurance company's name” instead of the current requirement for “the depositor's name.”

(3) Changes to Item 1(a)(3) to require disclosure of the types of

contracts

offered by the prospectus (

e.g.,

group, individual, single premium immediate, flexible premium deferred), as opposed to the current form, which requires disclosure of the types of

variable annuity

contracts offered by the prospectus.

(4) New Item 1(a)(5), which requires disclosure of the types of investment options under the contract and a cross reference to the prospectus appendix providing additional information about each option.

(5) We also are moving certain items to different locations on the front cover page without changing the content of the required disclosure.

Specifically, on Form N-4, current Item 1(a)(5), which requires disclosure of the date of the prospectus, is moving to final Item 1(a)(9); current Item 1(a)(6), which requires a statement required by rule 481(b)(1) under the Securities Act, is moving to final Item 1(a)(10); current Item 1(a)(7), which requires a statement that additional information about certain investment products, including variable and non-variable annuities, has been prepared by Commission staff and is available at investor.gov, is moving to final Item 1(a)(11); and current Item 1(a)(8), which requires a legend stating that new investors to the contract may be able to cancel the contract within 10 days without paying fees or penalties, is moving to final Item 1(a)(12).

We are adding new Items 1(a)(6) and (7) to the front cover page of final Form N-4, which we are adopting with modifications from the proposal, as discussed below. The four items on the back cover page—Item 1(b)—are largely unchanged with the exception of extending the disclosure requirements (suggested by a commenter) of Item 1(b)(3) to include the insurance company, if applicable.

See

CAI Comment Letter. The modification to Item 1(b)(3) is discussed in further detail below. Current Item 1(b)(3) indicates that reports and information about the registered separate account are available on the Commission's website. That language has been retained in final Form N-4. The statement would address available reports about the insurance company only if applicable.

In addition, and as proposed, the additional disclosures on the front cover page also will be required for

registration statements relating to offerings of variable annuities filed on that form to the extent relevant.

Specifically, these are disclosures relating to the complexity of the investment and potential loss of principal, that the contract is not a short-term investment and the appropriateness of that investment, and that an insurance company's obligations under the contract are subject to its financial strength and claims paying abilities.

While these disclosures are important for investors in non-variable annuities, they also are relevant in many cases to investors in variable annuities.

See

Proposing Release at Section II.B.1. Commenters did not specifically address the inclusion of these disclosures for variable annuity offerings.

See

final Form N-4, Item 1(a)(6), (7), and (8).

The comments that we received on the proposed cover page requirements were mixed. One commenter generally supported these disclosures, stating that the proposal ensured that the most important disclosures about RILAs appear on the cover page.

Another commenter suggested that, other than the disclosures related to maximum loss, the proposed cover page disclosures were, for the most part, designed to result in short, concise, and sensible cover page disclosures.

Other commenters, however, raised concerns.

See

Better Markets Comment Letter.

See

CAI Comment Letter.

Commenters suggested that, should the Commission extend the use of Form N-4 to registered MVA annuities, their comments would also apply to disclosures related to those securities.

See, e.g.,

CAI Comment Letter (supporting some aspects of the proposal but criticizing the maximum loss disclosure on the cover page); VIP Working Group Comment Letter.

First, some commenters raised concerns about the volume of disclosures proposed to be included on the cover pages, particularly those related to the maximum losses.

One such commenter suggested that the inclusion of all of these disclosures could cut against the form's layered disclosure approach.

These cover page disclosures are generalized statements designed to put an investor on notice of key considerations to help an investor make informed decisions. In particular, they are designed to highlight the complexities and certain associated risks of non-variable annuities for investors, and including this key information on the cover page helps ensure that an investor has information about these key aspects of a non-variable annuity at the outset. The number of specific features and risks highlighted on the cover page is driven by the complex nature of the non-variable annuity being registered. Further, because these points are generalized on the cover page but discussed in more detail later in the prospectus, they are consistent with the concept of layered disclosure. These disclosures also should help investors better understand the nature of the various investment options available under the contract.

See

CAI Commenter Letter; VIP Working Group Comment Letter.

See

CAI Comment Letter.

Second, commenters addressed certain specific items the Commission proposed to include on the front cover page. Commenters raised particular concerns with the proposed requirement to disclose as a percentage the maximum amount of loss from negative index performance that an investor could experience after taking into account the minimum guaranteed limit on index loss provided under the contract.

Commenters objected to this disclosure because, in their view: (1) requiring RILA issuers to disclose this percentage was unnecessary because the chance of investors experiencing this maximum loss was extremely remote,

100

(2) the cover page lacks appropriate context for this percentage and instead RILA issuers should include a narrative (not numeric) disclosure stating that an investor could lose a significant amount of money by investing in an index-linked option,

101

and (3) such maximum potential loss disclosure was unwarranted because other issuers of securities are not required to include this information on the cover pages of their prospectuses.

102

Separately, some commenters similarly opposed the proposed requirement to disclose, as a percentage, the maximum potential loss resulting from a negative contract adjustment as such a maximum loss would also be unlikely.

103

Proposed Form N-4, Item 1(a)(6).

100

VIP Working Group Comment Letter (stating that the analysis done by OIAD in the OIAD Investor Testing Report suggested that losses on these products over the long term have historically been remote); Comment Letter of Benji Johnson (Oct. 31, 2023) (“Johnson Comment Letter”); CAI Comment Letter; Datop Comment Letter;

see also

ACLI Comment Letter.

101

CAI Comment Letter.

102

VIP Working Group Comment Letter; Johnson Comment Letter; Datop Comment Letter.

103

Proposed Form N-4, Item 1(a)(7).

See

CAI Comment Letter; VIP Working Group Comment Letter. Several commenters also suggested that these two maximum potential loss disclosures, one from index performance and the other from contract adjustments, could cause investors to mistakenly believe that such losses are likely. CAI Comment Letter; VIP Working Group Comment Letter; Johnson Comment Letter.

In response to comments opposing the proposed requirement to disclose as a percentage the maximum amount of loss from negative index performance or from a contract adjustment that an investor could experience, the final disclosure requirements are designed to reflect that the risk that an investor could lose a substantial amount of money due to negative index performance is a key risk of a RILA.

104

Similarly, loss related to negative contract adjustments is a key risk of all non-variable annuities. Providing the maximum possible loss in these circumstances on the front cover page will alert investors to these risks in concrete terms. Moreover, disclosure of a maximum “potential” loss is not intended to suggest the maximum loss is likely to occur. The form does not prevent the insurance company from providing additional appropriate context.

104

VIP Working Group Comment Letter; Johnson Comment Letter; CAI Comment Letter; Datop Comment Letter;

see also

ACLI Commenter Letter.

Although issuers of other securities like mutual funds and ETFs do not disclose the maximum potential loss associated with those securities, such products also are not generally structured to provide loss protection. For RILAs, in contrast, loss protection is a central feature of the product and an emphasis in RILA marketing.

105

Numeric disclosure of the potential maximum loss helps an investor understand the extent to which a given RILA provides loss protection in simple terms. This is particularly important because investor testing has shown that investors struggled with the mechanics of loss protection and the consequences of withdrawals.

106

Placing this disclosure on the front cover page is designed to put investors on notice that those loss protections can, in the context of RILAs, have limitations and highlight, in the context of all non-variable annuities, a potential consequence of withdrawals. A numeric example is well suited for the cover page because it communicates the extent of loss protection briefly and

concretely, and additional context will be available elsewhere in the prospectus.

105

One commenter raising concern with this disclosure's placement in the cover page “acknowledge[d] that the risk of loss associated with RILAs is an important concept to convey [and that] [u]nlike most other investments, RILAs provide a level of downside protection, and an investor should therefore understand the limits of that protection.” CAI Comment Letter.

106

OIAD Investor Testing Report at Section 5, Qualitative Testing, Results from Round 1.

See

Proposing Release at n.75 and accompanying text (investor testing participants struggled to understand loss limiting features, such as buffers), and at n.33 and accompanying text (investor testing participants often did not understand that there are multiple aspects of a typical RILA contract that could negatively affect an investor's contract value or the amount that the investor could withdraw from the contract (

e.g.,

surrender charges, interim value adjustments, and tax penalties)).

Commenters also raised concerns with various proposed disclosure requirements' reference to “minimum guaranteed” limits on index loss (or gain), including raising this concern with respect to the cover page.

107

Another commenter sought clarification regarding whether a similar disclosure requirement referring to guaranteed minimums for the life of the contract was intended to require insurance companies to establish such minimums.

108

107

See

VIP Working Group Comment Letter (stating that contracts do not include a minimum guaranteed limit on losses); CAI Comment Letter.

108

CAI Comment Letter.

See

Proposing Release at Section II.B.1. for a discussion of the proposed disclosure requirement.

We understand that not all RILAs provide minimum guaranteed limits on index loss for the life of the contract that could be used to calculate the proposed maximum possible loss due to negative index performance. After considering comments, we are modifying the language of this disclosure requirement to reflect this fact. Under the final amendments, the insurance company must prominently state as a percentage the maximum amount of loss from negative index performance that an investor could experience after taking into account the current limits on index loss provided by the index-linked options under the contract.

109

The insurance company may provide a range of the maximum amount of loss if the contract offers different limits on index loss. Basing this disclosure on the contract's actual current limits on index losses is designed to address commenters' concerns about RILAs without guaranteed limits, and permitting the insurance company to provide a range of losses allows the insurance company to reflect the range of loss protection offered under the contract.

109

We understand that, unlike the current limits on index

gain,

current limits on index

loss

do not change often, if at all, during the life of the contract.

See infra

Sections II.C.2 and II.C.3.a (discussing concerns raised by commenters relating to the disclosure of current limits on index gain).

We are modifying the proposed language of this disclosure requirement to specify that an insurance company that does not disclose a minimum limit on index loss that will always be available under the contract must prominently state that it does not guarantee that the contract will always offer index-linked options that limit index loss, which would mean risk of loss of the entire amount invested. We are requiring this disclosure because RILAs are long-term investments, with an investor's returns determined by the economic terms available both at the time of investment and during future crediting periods. The guaranteed minimum limits on index losses that always will be available—or the fact that the insurance company makes no guarantee at all—are key considerations for an investor considering a RILA that should be disclosed on the cover page. The final amendments' approach therefore incorporates the proposed requirement to disclose on the front cover page the maximum loss from negative index performance taking into account guaranteed minimum limits on index losses but, in response to comments, provides information on any guaranteed minimum limits without assuming that each RILA offers them.

110

These changes, which are contained in Item 1(a)(6)(a), are mirrored in Instruction 3(a) to Item 3 and Item 5(a).

See, e.g., infra

at footnote 386.

One commenter stated that it found confusing the proposed requirement to state that the potential for investment loss could be significantly greater than the potential for investment gain.

111

After considering comments we have determined not to require the proposed disclosure because an investor's potential inability to recoup prior losses due to limits on gains is a nuanced concept that is challenging to articulate in concise cover page disclosure. We are instead requiring the insurance company to disclose information about the contract's limits on participation in positive index performance, not only because these limits are central features of a RILA, but also because they can limit an investor's ability to recoup losses (which the proposed disclosure item was designed to convey). We therefore are requiring the insurance company to prominently state, for each type of limit offered (

e.g.,

cap, participation rate, etc.), the lowest limit on index gains that may be established under the contract.

112

This information is particularly important for an investor considering a RILA because RILAs are long-term investments and the investor's returns are driven not just by the economic terms available at the time of investment, but also in future crediting periods. In another change from the proposal, we are not adopting the proposed Item 1(a)(6) requirement to state that an investor could lose a significant amount of money if the index declines in value. We are doing so because the required disclosure in this item, and elsewhere on the form, of the maximum possible loss due to declines in index performance make clear that investors face the potential for losses in these circumstances.

113

111

See

Johnson Comment Letter;

see also

proposed Form N-4, Item 1(a)(6).

112

See

final Form N-4, Item 1(a)(6)(b).

113